Purchasing a new home involves a variety of different expenses. The various components of your mortgage loan, such as the anticipated interest rate and monthly payment, are broken down in your loan estimate. It will also contain the anticipated settlement costs, also known as closing costs. You might be able to negotiate with the seller of the property to have them pay all or part of your closing costs, depending on the type of loan you receive. This can be decided during your sales contract negotiation.
If your down payment is less than 10%, the seller can contribute up to 3%. If your down payment is 10 – 25%, the seller can contribute up to 6%. If your down payment is more than 25%, the seller can contribute up to 9%.
What are closing costs?
Let’s look at what closing costs are and what fees and services are included before we get into the specifics. Closing costs include things like property taxes, homeowners insurance, title search fees, appraisal fees, etc. that must be paid in order to close on your home. At closing, you must pay all parties involved in your loan as well as any fees owed for services rendered during the process. Closing costs are the general term for all of these expenses. Despite the fact that they are known as closing costs, some of them, such as home inspections and appraisals, may require payment as they are completed. Although the loan estimate will include your anticipated closing costs, many of the fees listed there may change over time. The items frequently included in closing costs are listed below. Some of the items listed below may not apply to your specific circumstances because each state has different requirements. Other expenses that don’t fall under these headings could include things like home warranty fees, courier fees, and wire fees. In addition, costs for things like title insurance, mortgage insurance, and transfer taxes are not fixed. You should not be afraid to ask your mortgage banker to explain any aspect of your loan costs if you don’t understand them, even though everything will be itemized and broken down for you at closing.
Who pays for what?
Although every transaction between a buyer and a seller is unique and guidelines vary by loan type, buyers can bargain and even request that the seller pay all closing costs. Closing costs typically range from 2 to 6 percent of your purchase price. For instance, closing costs for a $200,000 home could range from $4,000 to $12,000 The seller is permitted to contribute to closing costs on conventional loans, FHA loans, USDA loans, and VA loans, but the maximum amount that can be contributed varies depending on the loan type.
Conventional loans
The rules for conventional loans are a little more stringent than those for other loans. A seller may contribute 3% to 9% of the sales price in closing costs, depending on the loan-to-value (LTV) ratio and the buyer’s down payment.
FHA and USDA loans
The seller may contribute up to 6% of the sales price toward closing costs, prepaid expenses, discount points, etc. under FHA and USDA loans. Although a down payment is not necessary for USDA loans, the funds from the seller may also be used to make the required down payment.
VA loans
With a VA Loan, the seller is able to cover all of the buyer’s closing costs and other prepaids, up to and including two discount points to lower the interest rate. They can also contribute up to 4% of the sales price toward discretionary expenses, which can be used to pay for things like appliances and debt repayment (such as a car loan or credit card). VA loans are extremely distinctive because no other program will permit the seller to pay discretionary costs.
Why would the seller be willing to cover my costs?
Although it may seem strange for a seller to cover your closing costs, there are benefits for both parties.
Additionally, when using discount points, the buyer will benefit from tax advantages. The buyer can deduct discount points from their taxes in the year following their purchase of a new home. Discount points are prepaid interest on your mortgage loan. Typically, one point equals one percent of the loan balance, and borrowers are permitted up to four discount points. Your interest rate will be reduced in proportion to the amount of discount points you pay. Therefore, 4 bonus points would equate to $8,000 in prepaid interest for a $200,000 home, which would help the seller sell their house more quickly. A quick, easy sale is also advantageous to sellers, who frequently want to purchase a home. Buying a home is a big decision and investment. Make sure you comprehend your closing costs if you’re purchasing a new home, and speak with your mortgage banker to determine what kinds of seller contributions to closing costs are feasible for your transaction.
FAQ
What is the maximum seller contribution with a 75% LTV on an investment property?
Maximum contribution is 9% for primary residences over 90% LTV (DU only), LTV/CLTV 75%.
What is FHA’s maximum allowable seller’s concessions?
FHA seller concessions have similar rules to conventional loans. The seller and other interested parties may contribute up to 6% of the sales price to closing costs, prepaid expenses, discount points, or other financing concessions for all FHA loans.
What is the maximum seller contribution for a mortgage secured by a primary residence on a 95% LTV?
3% of the sales price for any 5% down payment loan (95% loan-to-value) when using conventional agency financing for a primary residence or vacation home For any 10% or 20% down payment loan (90% or 80% loan-to-value), 6% of the sales price is required.
What are seller credits on loan estimate?
Funds that the seller contributes to the buyer’s side of the transaction at settlement are known as seller credits. Depending on the lender’s approval, you could use these funds to help you with other expenses like closing costs and repairs.